State of the Union: Tax war

WASHINGTON — President Barack Obama takes the dais in the House of Representatives on Tuesday to tell a joint session of Congress, Cabinet members, judicial and military dignitaries and a national television audience about his plans for the coming year.

As a first step for politicians looking to address rising inequality in the US, overhauling how capital gains are taxed would seem like a good place to start.WASHINGTON — Republican lawmakers are already signaling they will do what they can to block President Barack Obama’s pitch for tax increases on the wealthiest Americans. Similarly to the UK, the US tax code favours income generated from rising asset values, such as an increase in share prices, over income generated from work, such as wages and salary. Obama is making that pitch to a huge television audience in hopes of putting the new Republican Congress in the position of defending top income earners over the middle class.

Here’s a brief explanation of what was originally known as the president’s Annual Message to Congress: Beginning with Thomas Jefferson, who rejected the ceremonial speech in 1801, presidents for more than a century gave their messages not in person but in writing. And if Republicans say no — especially to catchy-sounding ideas like getting rid of the “trust fund loophole” — they can explain it to voters in 2016.

This gap in how different kinds of income are taxed overwhelmingly benefits the wealthiest US households, which are much more likely to hold investments that grow in value over time. Others on the list are ordinary Americans who exemplify aspects of the administration’s programs — a community college student, an auto worker, a woman who trained to be a construction worker, a small business owner, a college student brought to the United States as a child by her undocumented parents.

The Congressional Budget Office estimated in 2013 that 93 per cent of the benefits from the preferential tax treatment of capital gains flowed to the richest 20 per cent of Americans, and a full 68 per cent of the benefits went to the top 1 per cent. From expanded health coverage to broadening a tax credit for workers, the president also wants to put more money in the pockets of lower-income earners. Altogether, the new tax benefits for middle-class families would cost $175 billion over 10 years, according to senior administration officials — in addition to the $60 billion price tag for the proposal Obama has already announced to make community college tuition free for two years. Ahead of a State of the Union speech where the president will outline how far the economy has come since the financial crisis, and what further steps he plans to take to boost growth, tackling inequality will again feature as a central theme. His plans face opposition from the Republican-run Congress, which wants to cut taxes and spending. “Now that the economy’s in a stronger place than it’s been in a very long time, we need to double down on our efforts to deal with wage stagnation and declining economic mobility,” Dan Pfeiffer, a senior adviser to Obama, said Sunday on CBS’s “Face the Nation” program. “In divided government, each side should lay out their agenda, what they think is in the best interest of the country.

Also on the guest list is astronaut Scott Kelly, who will launch in March to the International Space Station, on a mission to become the first American to spend a year living and working on the orbiting platform. Republican Senator Marco Rubio, meanwhile, said he had invited Rosa Maria Paya, the daughter of a Cuban dissident Oswaldo Paya who was killed in a 2012 car crash in Cuba to be his guest at the speech. “While I disagree with the president’s new Cuba policy, I hope Rosa Maria Paya’s presence on Tuesday night will at least remind him that her father’s murderers have not been brought to justice, and that the US is now, in fact, sitting at the table with them,” Rubio said.

But he said on ABC’s “This Week” that the president has fallen short by failing to establish close ties to Congress. “Slapping American small businesses, savers and investors with more tax hikes only negates the benefits of the tax policies that have been successful in helping to expand the economy, promote savings and create jobs,” Sen. However, with the US economy now recovering more strongly than most other large, developed economies, Mr Obama believes he has a chance to at least partly recast the national debate on tax.

Orrin Hatch (R) of Utah, chairman of the Finance Committee, said in a weekend statement. “More Washington tax hikes and spending is the same, old top-down approach we’ve come to expect from President Obama that hasn’t worked,” said Michael Steel, a spokesman for House Speaker John Boehner. For decades, that debate has centred on whether lowering taxes helps to stimulate economic growth, as most Republicans contend, or whether the tax system should be used as a means of transferring wealth from the rich to the less affluent and the poor, mainly in the form of social programmes. Roosevelt, with World War II looming, used his 1941 address to outline the “Four Freedoms” — freedom of speech, freedom of worship, freedom from want and freedom from fear. The safety net stabilized income in the 2007-2009 recession and its aftermath, said Richard Reeves, a senior fellow at the Brookings Institution in Washington.

Both sides want to lower corporate tax rates, but many GOP lawmakers insist that individual tax rates need to be reduced as well, and Obama and most Democrats say that would just be a boon for the wealthy. Bush, in the first live webcast, outlined plans for a “war on terror” four months after the Sept. 11, 2001, terror attacks on New York and Washington.

Transfer payments don’t have the same quality-of-life value as earning money from work, said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington and a former Republican Senate aide. But Obama administration officials insist that several of the ideas have drawn bipartisan support in the past, including the bank fees, which are similar to a proposal former House Ways and Means Committee Chairman Dave Camp included in his tax reform proposal last year.

Officials in Mr Obama’s administration believe that figure would rise further still if more people were aware of policies such as the so-called “stepped up basis” loophole, which allows wealthy families to transfer capital gains income tax free between generations. Amid low wage growth, he said, “the bottom fifth has not done well.” “Our job now is to make sure that every American feels that they’re a part of our country’s comeback,” he said in his Jan. 17 weekly radio address. And it has seen presidents make proposals that never happen, such as Ronald Reagan’s call for a missile defense shield to protect against nuclear attack or Obama’s vision of 1 million electric cars on U.S. roads by this year.

Republican leaders, however, showed no enthusiasm for the idea. “The president’s going to take this opportunity to make the case directly to the American people why we can, and in fact need to, move forward on an agenda like this,” said another senior administration official. “We are hopeful that what we will see is a positive response, particularly from those who have championed similar ideas in the past.” Obama’s message to Congress, the official said, will be: “If we all focus on middle-class opportunity and try to help middle-class families, there are clearly pragmatic things that we could do that have bipartisan support, and so let’s try to get them done.” The main middle-class benefits in Obama’s plan are the beefed-up child tax credit, which, it predicts, would help 5 million families cover their child care costs, and a new tax credit of up to $500 for households in which both spouses work. Instead, heirs benefit from a provision that gives them a starting value in the asset for tax purposes that is “stepped up” to its value at the time of inheritance, rather than its value at the time it was purchased.

Administration officials pointed to a third proposal from the president as one they hope Republicans would support: a fee on the roughly 100 US financial firms with assets of more than $50 billion. The CBO estimates that by not levying capital gains tax on assets transferred at death, the government will miss out on $644bn of tax revenues between 2014 and 2023.

And to help with their retirement expenses, he’d require all businesses with more than 10 workers to enroll their workers automatically in an individual retirement account if they don’t offer a retirement plan already. The focus on capital gains and dividends and the effective rate paid by the wealthy revives a debate that dominated the 2012 election — when Democrats hammered Mitt Romney’s relatively low tax rate — which he enjoyed largely because the former private equity executive made most of his wealth from investments. CAP, founded by Obama counselor and expected Clinton campaign chairman John Podesta, released proposals last week that it says will promote prosperity for all.

Under the current Tax Code, administration officials say, someone who inherits $50 million in stock — in a portfolio that was originally worth $10 million — doesn’t have to pay income tax on the $40 million capital gain. This administration isn’t new to ambitious plans to benefit the poor: The president’s health law is intended to offer low-income Americans stability through insurance. Obamacare was projected to increase incomes for the bottom fifth of earners by almost 6 percent in 2016, using the most generous estimates, based on a Brookings Institution study from last January. Obama would also consolidate several education tax breaks into a single tax credit worth up to $2,500, and is proposing to end taxation of some student loan debt forgiven under income-based repayment plans.

Earlier this month, he announced that the Federal Housing Administration (0814796D:US) would cut its mortgage-insurance premiums by about 37 percent, enough to save most borrowers $900 a year on their loan payments. She has gotten both a bachelor’s and a master’s degree since being laid off from her full-time position in 2009 yet only landed a part-time, $20,000 job as a community organizer in Charlotte, North Carolina. Under the plan, about 7.7 million workers would qualify for a larger credit and 5.8 million more would become newly eligible, according to an administration analysis. Obama also called on Congress to raise the minimum wage to $10.10 from $7.25, which would benefit 28 million Americans, according to the Department of Labor.